3.7.13 Capitalization Rates and Determination of Value

A. Capitalization rates represent the blended or weighted cost of capital to the investor and the various methods of calculating capitalization rates utilize the mortgage constant to represent the debt portion of the cost of capital. Capitalization rates should generally exceed the mortgage constant in nearly all cases, and the MAP Underwriter should compare the mortgage constant to the capitalization rate as a test of reasonableness. A capitalization rate that is less than this mortgage constant may indicate a market that is over-heated or that that the capitalization rate data in the appraisal is flawed. Regardless, a capitalization rate that is less than the mortgage constant may indicate the need for a more in-depth review.